Swiss Trust Law / Taxation (Part 1): Unconstitutionality of proposed tax solution
A Swiss trust is to be created so that the trust industry (approximately 400 Trustees) in Switzerland does not have to turn to foreign trusts. A Swiss trust would at the same time open up new application and business opportunities and thus strengthen Switzerland as a business location. The introduction of a trust law is in line with an international trend.
We support the introduction of a trust in principle, but we are concerned to find a solution for taxation as well.
At present, taxation of trusts is based on the general principles of tax law and two circulars. The Federal Council that has proposed to maintain the existing principles and to not allow a solution that might not be in line with the constitution. However, according to the consultation draft, de lege ferenda, the irrevocable discretionary trust should against the constitution be taxed like a foundation, Art. 10a para. 3 E-DBG and Art. 6a para. 3 E-StHG.
In principle, two alternatives are possible: a) maintain the status quo, or as the Federal Council proposes, b) codify it in the tax laws. We will focus on the latter. In this article we will first condemn the unconstitutionality and in a following article propose what we consider to be the correct codified tax solution:
Unconstitutionality
In addition to the new regulation of trusts in the Swiss Code of Obligations, various federal laws are to be amended. For example, the tax laws should in future explicitly regulate how trusts are treated for tax purposes. As mentioned, currently, taxation is based on the general principles of tax law and two circulars. Specifically, the Federal Council proposes to maintain the existing principles and to not allow a solution that might not be in line with the constitution. Irrevocable trusts without fixed claims of the beneficiaries are now to be taxed in principle in the same way as foundations. This proposal is not only wrong, but also unconstitutional.
Unfortunately, the consultation draft disregards constitutional conformity with the taxation proposal, which is the FC's primary criterion: According to Art. 128 para. 1 lit. b of the Federal Constitution, Switzerland may only levy direct federal tax on the net income of legal entities. According to the consultation draft, however, the trust is not a legal entity. Without a constitutional amendment, a trust cannot be equated to a legal entity for tax purposes and can thus not be taxed as such.
Due to the unconstitutionality, the income on the trust assets cannot be taxed like a foundation (legal entity). Therefore, only income tax can be taken into account. The constitutionality of taxation according to economic capacity can be ensured by continuing to tax the income created on the trust assets at the settlor's level, whereby the settlor waives his constitutional right to taxation according to economic capacity (option 1). If the settlor exercises his constitutional right (right of election), the income from the trust assets is no longer taxed (option 2). Option 1 corresponds to current practice in the taxation of trusts, while the tax consequences of option 2 must be redesigned within the framework of existing tax law instruments.
Read our proposal in the subsequent article.
